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States’ Senior Tax Breaks Reinforce Unequal Wealth, Income by Race

Most states provide costly, poorly targeted income tax breaks to seniors regardless of their income, reinforcing the unequal distribution of income and wealth that was driven in part by years of discrimination and other barriers for people of color. Re-targeting these tax breaks to people who need them the most would substantially benefit low-income seniors (including seniors of color), help offset income and wealth inequality, and generate savings to finance public services that can bolster the broader economy.

State tax breaks for seniors exempt income from retirement accounts, pensions, and Social Security, and they also include personal exemptions and deductions based on age. States can better target these breaks by means-testing them so that they don’t go to high-income seniors who don’t need them. They could also expand state Earned Income Tax Credits to seniors and take other steps to make state tax systems less regressive, as most are today.

Current state tax breaks for seniors tend to reinforce wealth and income inequities by race because:

  • Seniors of color are less likely to benefit from tax breaks for retirement accounts. The jobs that people of color typically have (or have had) are less likely to include retirement plans such as a 401(k) or pension. Access to pensions — and the size of pension payments — typically depends on the number of years worked and average pay. Many people of color have lower-paid positions with high turnover, making it harder for them to stay employed long enough to be promoted or qualify for a pension, and making them eligible for smaller pensions, on average, if they do qualify. For many decades, Black workers have been roughly twice as likely as white workers to be unemployed. They’re also often among the “first fired” in economic downturns and sometimes the “last hired” due to discriminatory hiring, another factor resulting in smaller pensions. All of these factors make it harder for people of color to build retirement savings: 30 percent or fewer of senior households of color have some retirement account income, compared to 47 percent of white senior households. (See figure.)
  • The value of other tax breaks for seniors rises with income, which is shaped by historical racism and contemporary discrimination. Wealth builds over time and often over generations, so its current distribution partly reflects the cumulative impact of myriad historical acts of racism (including slavery and Jim Crow laws, the seizure of tribal lands despite treaty agreements, redlining and racial housing covenants, and more) as well as ongoing racial discrimination and bias. The wealthiest 10 percent of white households own nearly two-thirds of the nation’s wealth; people of color comprise 35 percent of all households but own just 13 percent of the wealth. Black households have one-tenth the wealth of white households, and Latinx households one-eighth, on average. This means that when they retire, seniors of color are much less likely than white seniors to have significant investment income that such wealth generates, such as capital gains, interest, and dividends. Despite these disparities, most states provide seniors with age-based personal exemptions or higher standard deductions, generally regardless of their income or wealth. These breaks provide a greater benefit to (largely white) higher-income taxpayers because their marginal tax rates are higher. Plus, some states provide additional exemptions on investment income, which is disproportionately held by white households, such as Michigan, which exempts about $23,000 in capital gains, interest, and dividends for couples over 73.
  • Seniors of color depend the most on Social Security but benefit the least from state exemptions on Social Security income. More than half of Hispanic seniors get 90 percent or more of their income from Social Security, as do 45 percent of Black seniors, compared to less than one-third of white seniors. The federal government exempts Social Security income from taxation for lower-income taxpayers. All states follow this federal treatment, but a number go much further and fully exempt Social Security income, which only benefits taxpayers who are subject to the federal tax on such income — often people with substantial means (who are disproportionately white) who have built up assets over time.

States can reduce racial and ethnic disparities in their tax codes and economies by creating a better tax system for lower-income households. In 45 states, households with the lowest income pay a larger share of their income in state and local taxes than high-income households. Black and Latinx households make up a disproportionate share of low-income households: 22 percent of the nation’s tax filers are Black or Latinx, but they make up 30 percent of the bottom fifth of tax filers ranked by their earnings.

Better targeting senior tax breaks would help fix these regressive state tax systems and advance racial justice, including by generating revenue for public investments that can boost opportunities for people of color. Ensuring high-quality schools in all communities, making safer water systems and other improvements to public infrastructure (which is often neglected in communities of color), expanding access to affordable health care, and making other investments that reduce racial and ethnic inequities would help build an economy of more widely shared benefits.

When these kinds of public investments are strong and administered with equity in mind, they can help break down barriers to opportunity for communities of color and help more Americans achieve their potential, to the benefit of the broader economy.